Backward induction with players who doubt others' faultlessness

Aviad Heifetz, Ady Pauzner

Research output: Contribution to journalArticlepeer-review

Abstract

We investigate the robustness of the backward-induction outcome, in binary-action extensive-form games, to the introduction of small mistakes in reasoning. Specifically, when a player contemplates the best action at a future decision node, she assigns some small probability to the event that other players may reach a different conclusion when they carry out the same analysis. We show that, in a long centipede game, the prediction that players do not cooperate fails under this perturbation. Importantly, this result does not depend on forward induction or reputation reasoning. It particular, it applies to finite horizon overlapping generations models with fiat money.

Original languageEnglish
Pages (from-to)252-267
Number of pages16
JournalMathematical Social Sciences
Volume50
Issue number3
DOIs
StatePublished - Nov 2005

Keywords

  • Backward induction
  • Centipede game
  • Cooperation
  • Game theory
  • Overlapping generations

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